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Each week Josef Schachter gives you his insights into global events, price forecasts and the fundamentals of the energy sector. Josef offers a twice monthly Black Gold newsletter covering the general energy market and 30 energy, energy service and pipeline & infrastructure companies with regular updates. We also hold quarterly webinars and provide Action BUY and SELL Alerts for paid subscribers. Learn more.
Global Economic Update:
Last Friday Chairman Powell took off his gloves and made it clear that the Fed and other Central Banks were committed and adamant that they would restore price stability no matter what amount of economic pain is required. The expectation now is that the Fed will add 75BP to their increase on Wednesday September 21st. With the US unemployment rate at 3.5% forecasters expect this will need to rise to 5-6% in the coming quarters to quell wage pressures. With the price of money rising and liquidity shrinking (the Fed will sell down US$95B/month of bonds and mortgage holdings starting in September) this will add to the tightening and speed of recessionary conditions.
European electricity prices have gone up 11x in two years. They have doubled just in the last few months as natural gas prices rocket higher and nuclear power production slows as river water levels shrink due to droughts and low water levels impact hydropower production. Also the price of thermal coal for coal fired power plants has reached new record high prices. Power prices in Germany broke last week above 1,000 Euros as the energy crisis intensifies. This winter could be a major shocker to consumers and industry if blackouts or sharp allocation cutbacks of electricity or natural gas occur. The UK reported today that their inflation rate in July rose at a 10.1% pace and they expect higher rates as food and energy prices spike in the coming winter months. The Bank of England sees a lengthy period ahead of double digit inflation in the UK. Goldman Sachs yesterday forecast UK inflation could top 22% next year if natural gas prices remain elevated or reach even higher. Across the Euro-Zone prices surged 9.1% in August.
People in Europe and the US are having difficulties paying their power bills. In the US 20M households are behind in their utility bills and face cut-off of supplies if they don’t pay their outstanding bills before winter hits. Russia’s tweaking of supplies to Europe is driving political leaders and energy providers nuts. France like Germany have told many industries that they will be the first to see cuts in electricity if natural gas supplies are limited. Recession is inevitable in most of Europe this winter. Russia’s weekly maneuvers regarding natural gas shipments will be closely monitored.
EIA Weekly Oil Data: The EIA data of Wednesday August 31st was mixed for oil prices. US Commercial Crude Stocks fell 3.3Mb to 418.3Mb. The forecast had been for a decline of 600Kb. The US Strategic Petroleum Reserve (SPR) had a release of 3.1Mb last week. US Exports fell last week by 210Kb/d. Motor Gasoline Inventories fell 1.2Mb. Offsetting this, Distillate Fuel Oil Inventories rose 0.1Mb. Refinery Utilization fell 1.1% to 92.7%. US Crude Production rose 100Kb/d back to 12.1Mb/d.
Total Demand last week rose 734Kb/d to 20.0Mb/d as Other Oils demand rose 525Kb/d. Motor Gasoline demand rose 157Kb/d to 8.59Mb/d. Jet Fuel Consumption rose 221Kb/d to 1.82Mb/d. Cushing inventories fell 500Kb to 25.3Mb on the week.
The very bearish part of the report was the sharp decline in consumption versus last year. Total Demand was down 2.75Mb/d from 22.8Mb/d, while Motor Gasoline consumption fell 987Kb/d from 9.58Mb/d. Jet Fuel consumption rose 27Kb/d from the prior year.
EIA Weekly Natural Gas Data: US Natural gas storage is being built up slowly for winter 2022-2023. The US data released last Thursday showed a build of 60 Bcf which compares with a build of 18 Bcf in the prior week. Storage is now at 2.579 Tcf but needs to get over 3.50Tcf by November 1st, which is unlikely. The biggest increase was in the Midwest (30 Bcf). The five-year average for last week was an injection of 49 Bcf while in 2021 it was an injection of 20 Bcf. US Storage is now 12.0% below the five-year average of 2.932 Tcf. Today NYMEX is at US$8.96/mcf. AECO is trading at a depressed $0.14/mcf (yes – that is correct) as plant maintenance and lack of takeaway capacity keep domestic prices low.
This winter Europe may see even higher natural gas prices depending on the allocation of natural gas volumes by Russia. Putin wants to force Europe to loosen sanctions and is using food and natural gas as tools to get what he wants. European leaders are complaining about the use of natural gas volumes as a weapon of war but Putin points out correctly that the US and NATO move to reduce access to the ‘SWIFT’ payment system was a similar weaponizing of the financial clearing system as an act of war against Russia. Some countries in Europe already seem to be tired of the war and the demands on their military by Ukraine’s persistent requirements for more and more money and weapons to fight Russia. Exasperated European nations could slow down support for Ukraine as they take care of their domestic needs. Italy and Germany are two countries facing such pressure already. The UK is planning on blackouts this winter as they set up an emergency energy plan. Cutbacks of around 20% of supplies are being planned for across Europe. This will surely throw the area into a hard landing recession.
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So far 29 company Presenters have confirmed and are listed under the Companies tab at the top of the conference registration page. We expect to complete our full conference Presenter line-up of 35 companies during September. We plan to arrange quite a few meetings in the coming weeks to complete our line-up.
Baker Hughes Rig Data: In the data for the week ending August 26th the US rig count rose three rigs to 765 rigs. Of the total rigs working last week, 605 were drilling for oil and the rest were focused on natural gas activity. The overall US rig count is up 51% from 508 rigs working a year ago. The US oil rig count is up 48% from 410 rigs last year at this time. The Permian basin saw an increase of three rigs to 348 or up 40% from a year ago’s 249 rigs. The natural gas rig count is up 63% from last year’s 97 rigs, now at 158 rigs. The industry has been responding to higher prices with more activity than last year which should continue to lift overall US production further in the coming months.
In Canada there was no change in rig count. The total count is now 201 rigs. Canadian activity is up 37% from 147 rigs last year. While rig and frack day rates are rising, costs are as well. Peak potential for staffed rigs is likely around 225 so that may be the high rig count for this summer. Activity for oil grew 60% to 136 rigs up from 85 last year and natural gas rigs rose by 5% to 65 rigs from 62 a year ago. This minor increase in rig activity for natural gas likely relates to the low current prices in Alberta. Once we get closer to winter, activity should pick up as prices usually strengthen once the drawdown season starts.
We expect to see US crude oil production reaching 12.5Mb/d before year-end (now 12.1Mb/d). The EIA has forecasted US production reaching record highs over 13.1Mb/d during 2023. This could rise even higher if the Republicans gain control of Congress and reverse Biden’s anti-energy stance, remove bureaucratic delays, and give some supportive policies for the industry to make long term growth plans.
Conclusion:
Bullish pressure on crude prices:
- The Saudi’s are proposing to cut OPEC production by any amount that Iran is allowed to bring back on if there is a nuclear agreement that allows Iran to increase oil shipments quickly and in large quantities. Iran may be able to add 1.0-1.5Mb/d if their data is correct and they have ships loaded and ready to unload near consuming countries.
- The Saudi’s are also proposing to keep supplies tight this winter to keep crude prices high. They want to see Brent over US$100/b throughout winter. They do not give a hoot about the recessionary pressures of their customers.
- OPEC’s production is now 2.84Mb/d, below their official target. Part is due to production difficulties in some countries but also due to the desire to keep supplies tight so that the members can maximize revenues. They announced a miniscule increase of 100Kb/d for September but they have yet to meet one of their official quota levels. They were supposed to add 648Kb/d in July and August but only added 216Kb/d in July.
- Russia has halted deliveries on some of its export pipelines to disrupt Europe. They recently cut back deliveries on their Druzhba line.
Bearish pressure on crude prices:
- An Iran deal looks more and more likely as the US gives concessions to get a deal done before the US November Congressional elections.
- The EU, US, Japan, South Korea, Australia and Canada are all heading into recessions which will lower demand for crude by 4-5Mb/d. Driving by US and Canadian consumers is down.
- Europe is moving to reopen coal-fired plants and delaying closure of their three remaining nuclear power plants (Germany) to meet their electricity demand. Rationing of crude, crude products and natural gas are being implemented as well. Germany is implementing plans to cut back natural gas access to some industries. For some large and important industries like chemicals they are talking of cutting back access by 50%, which will be a job killer and will add to the economic braking they are planning. How severe the recession will be is the question and this depends on what natural gas Russia does send to Germany this winter.
- The high cost of energy is lowering consumers’ and industry’s capacity to handle the cost pressures.
CONCLUSION:
The Russian invasion of Ukraine and the resultant tough sanctions against Russian crude oil sales to Europe has spiked up crude prices globally. Higher energy costs are pushing economies into recession. This should drive down global crude demand by 4-5Mb/d over the next 3-4 quarters.
As global recession unfolds, crude prices should plunge sharply. In 2008-2009 during the financial crisis, demand fell by over 5Mb/d from over 88.5Mb/d to 83Mb/d. The price of crude fell from US$147.27/b to US$33.55/b in eight months. During Iraq’s invasion of Kuwait, prices rocketed from US$16.16/b in July 1990 to a high of US$41.15/b in October and then plunged in four months to US$17.45/b as recessionary demand destruction occurred. WTI today is at US$89.04/b. Next stop is a breach of US$80/b which we see happening in late September. The final corrective low for the ‘pause that refreshes’ this new nascent energy super cycle, should occur during October and reach below US$70/b. This upcoming climactic low should provide fabulous buying opportunities at great prices for energy stocks, much lower than current prices.
Energy Stock Market: The stock markets around the world are gyrating. Over the last 10 trading days the Dow Jones Industrials Index has fallen 2,700 points. We are in the early part of a waterfall decline. A breach of 29,700 for the Dow should start the most painful phase of the decline down to the 24,000 – 25,000 area by late September.
The S&P/TSX Energy Index today is at 239. A breach of 195.68, the low of early July and the low for 2022, could cause a sharp decline to the 145-150 area in the coming months.
Downside for the Dow Jones Industrials is towards the 24,000-25,000 range in the coming months (down from the year high at 36,953). Continue to hold cash for the next great buying opportunity expected during October. Today the Dow is at 31,510. Once we see the market showing climatic bottom signals we intend to send out Action Alert BUY ideas to subscribers. To become a subscriber and get these timely Alerts Go to https://bit.ly/2FRrp6k
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